Preparing a Budget

A budget is a financial plan. It can be drawn up by any group of people who need to know how much it will cost them to carry out a plan of action.

A budget is an estimate of the Income that you hope to generate, and the Expenditure you expect to incur in carrying out the plan.

It can be prepared for a particular activity- 
If you want to hire a coach for an outing to Margate, and provide a picnic, you will need to find out how much it costs to hire the coach, how much to park it in Margate, how much the picnic will cost, and how much you will need to charge the people going. (Or how much money you need to raise to pay for everything!).

It can also be prepared to cover a period of time-
For example, you may be planning to employ a worker to provide services or activities for your users. You would need to estimate how much it will cost to pay the worker for a whole year, what insurance policies you need, how much Employer's National Insurance will cost, what other costs will be incurred in running the service (telephone, travel, cost of materials etc.)

In each case the budget provides you with a financial plan. It helps you to see what things will cost so that you can make sure you have enough money to carry out your plan.

Your budget is also a very important tool for financial management. By comparing your budget to what you actually spend (and raise), you can see any troublespots and take action to put things right before you run into financial difficulty.


The Budgeting Process

The budgeting process can be applied to every type of plan. In some cases the process can be shortened, but if you keep each stage in mind whenever you need to prepare a budget it will help to make sure you don't miss out an important point!

(i) Main Objectives
  • what will we set up?
  • why is it needed?
  • who will benefit from it?
  • what outcomes do we hope to achieve?

(ii) Strategy
  • what are our target levels of service / activity?
  • how will it be managed?
  • will it need paid workers?
  • where will it be based?
  • what equipment will be needed?

(iii) Drawing Up The Budget
  • how much will it cost, based on our target levels?
  • for what period of time?
  • can we generate our own income?
  • if so, how much?
  • how do similar projects operate?
(iv) Fundraising
  • How will it be financed?
  • who do we apply to for funding?
  • how much do we apply for?
  • when might funding commence?
(v) Review
  • given our resources, are we able to really fulfil the need?
  • should we wait, or go ahead?
  • is our strategy workable?
  • are our aims realistic?

Drawing up the budget

This is the stage which can mean doing a lot of research and involving as many people as possible for their ideas, comments, suggestions and costings. This can be very time consuming and you need to allow for this. The work should be planned so that the budget can, ideally, be agreed at least two months before the start of the financial year.

No one person should be expected to produce the budget alone. The more people you involve (i.e. treasurer, other committee members, volunteers, workers, and others connected with the organisation), the better chance that your budget will be soundly based. There is no magical formula to produce "the perfect budget". In fact, no budget is 100% accurate!

Guidelines

The following are guidelines you may find useful to follow when producing your budget. They can be used when you are budgeting for a specific project or activity (e.g. fundraising day etc.), or for revising an existing budget, or for setting up a new organisation.


Stage 1: Producing the outline

Start of by making a list of all the expense headings you can think of that may be needed to run your project or organisation. Keep Revenue / Running Cost headings separate from Capital Cost headings.

(Revenue / Running costs are expenses of a recurring nature such as rent, rates, salaries, electricity, postage, printing, telephone etc. Capital costs (also known as fixed assets expenditure) are the costs of items expected to last for longer than a year such as a computer, furniture, filing cabinets, minibus etc.)

Then make a list of all the likely sources of income headings such as membership subscriptions, grants, donations etc.

Stage 2: Filling in the figures

Estimate as realistically as you can (e.g. by talking to other similar organisations, shop staff, equipment suppliers, coach hire companies etc.) the cost of each item of expenditure.

If you will be taking on staff, obtain details of current pay rates and Employer's National Insurance Contributions.

It can often be helpful to think of costs in terms of being Fixed, Variable or a mixture of the two.

"Fixed costs" are those which you have to pay regardless of your level of activity. (In reality they are only fixed in the short term, because you could decide on major changes in activity level that would affect them).

Some examples of fixed costs:

  • Rent of premises
  • Basic Insurance
  • Salaries of permanent staff

"Variable costs", are those items of expenditure that fluctuate depending on your activity level. For example, if you plan to provide more language classes, the cost of sessional tutors wages and the costs of educational materials will rise.

Note also that some costs will be a mixture of fixed and variable costs. The simple budget heading of "telephone costs" will include the fixed cost of line rental and the variable cost of calls made.

It is important to make clear written notes on how you estimated each cost and on any items which you aren't too sure about or which need further information These will help to explain what factors or assumptions the figures are based on.

If you are revising an existing budget, look carefully at the previous year's figures and decide whether you can rely on them as a guide. Do you need to completely revise those figures in the light of your current level and nature of activities?

Stage 3: Revising the figures

Now it's time to look back at your budget headings and estimates to decide whether you have left anything out. Check any costs you weren't sure about. Check whether there any other items you need further information on. Are you happy with the figures? Do you feel you need to revise them further?

Remember that if you are applying for funds, it may take quite a long time for the money to come through. Check whether you are using current costs. If you are adding in an amount for inflation, is the amount realistic?


Stage 4: Making contingency plans

The Management Committee should consider the budget carefully and ask any questions they feel are relevant.

What if your grant applications don't all come through and you have an income shortfall? What will you do? (e.g. scale down activities? not start the project? split the project into different phases and start just the first phase of the project? etc.)

Direct and Indirect Costs

Direct costs:

If you only intend to run one service or activity, then all your costs can usually be considered as the direct costs of that service.

Take an advice service for example. Direct costs will obviously include:

  • the advice worker's salary
  • the costs of welfare benefits handbooks
  • training courses for the worker

In a "one-service" organisation, the costs of rent, photocopying, insurance, audit / independent examination etc can also be thought of as direct costs. When preparing a budget for the service, they would need to be included as well.

In a "multi-service" organisation, there will also be clearly identifiable direct costs associated with each service. There will also be costs which are central to the running of the organisation and its services, but can not easily be identified as the direct costs of any particular service. These are known as indirect costs.

Indirect costs:

In a "multi-service" organisation, these might include manager time, administrator time, insurance cover, rent and maintenance of premises and audit fees. These indirect costs need to be apportioned to each service to gain a clearer picture of the real cost of running each service. There are various ways that you could decide to apportion such costs:

Manager / administrator time: by a percentage of the salary cost of each service

Insurance: by the number of staff employed for each service

Rent and maintenance of premises: by the percentage of space used by each service, or by the number of staff employed for each service.

Audit fees: by the percentage of income (or expenditure) of each service.

Obviously it will make life easier if you can use one method for all the apportionments, but sometimes this may not be the best way to gain the most useful information on costs.

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